BILL ANALYSIS �
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|Hearing Date:July 1, 2013 |Bill No:AB |
| |780 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Ted W. Lieu, Chair
Bill No: AB 780Author:Bocanegra
As Introduced: February 21, 2013 Fiscal: Yes
SUBJECT: Small business financial development corporations.
SUMMARY: Appropriates $2 million in General Fund monies to provide
administrative support to financial development corporations (FDCs).
Existing law:
1)Establishes GO-Biz within the Governor's Office for the purpose of
serving as the lead state entity for economic strategy and marketing
of California on issues relating to business development, private
sector investment and economic growth. GO-Biz also serves as the
administrative oversight for the California Business Investment
Service and the Office of the Small Business Advocate. (Government
Code (GC) �� 12096-12098.5)
2)Authorizes GO-Biz as the lead entity for economic strategy and the
marketing of California on issues relating to business development,
private sector investment and economic growth. Authorizes GO-Biz, in
this capacity, to coordinate the development of policies and
criteria to ensure that federal grants administered or directly
expended by state government advance statewide economic goals and
objectives. Authorizes GO-Biz to market the business and investment
opportunities available in California by working in partnership with
local, regional, federal, and other state public and private
institutions to encourage business development and investment in the
state. (GC � 12096.3)
3)Makes findings and declarations that, among other provisions, by
using public sector resources and powers to reduce the risks and
costs that could prohibit investment, the public sector often sets
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the stage for employment-generating investment by the private
sector.
(GC � 13997.2 (4))
4)Defines the following:
a) "Economic development" as any activity that enhances the
factors of productive capacity, such as land, labor, capital, and
technology, of a national, state, or local economy. Economic
development includes policies and programs expressly directed at
improving the business climate in business finance, marketing,
neighborhood development, small business development, business
retention and expansion, technology transfer, and real estate
redevelopment. "Economic development" is an investment program
designed to leverage private sector capital in such a way as to
induce actions that have a positive effect on the level of
business activity, employment, income distribution, and fiscal
solvency of the community. (GC � 13997.2 (5)
b) "Financial intermediary" as an institution, firm,
organization, or individual who performs intermediation between
two or more parties in a financial context, such as connecting
sources of funds with users of funds. A financial intermediary
is typically an entity that facilitates the channeling of funds
between lenders, investors, foundations, or other entities that
have money and are interested in connecting with businesses or
communities where their money can be deployed. Financial
intermediaries include, but are not limited to, banks, financial
development corporations, economic developers, microbusiness
lenders, and community development organizations. (GC � 13997.2
(8))
c) "Small businesses" as a business with less than 100 employees
and with a gross revenue of less than $5 million, or a business
that is otherwise targeted by or participating in a federal or
state program engaged in programs or services for small
businesses.
(GC � 13997.2 (11))
d) "Microbusiness lender" as a nonprofit or nonbank lender that
serves very small businesses in low- and moderate-income
communities that experience barriers in accessing capital. These
businesses are often owned by minorities, immigrants, women, and
persons with disabilities. Microbusiness lenders generally
provide loans under $50,000 and offer business technical
assistance, both preloan and postloan, to improve an applicant's
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ability to qualify and successfully repay a loan. (GC � 13997.2
(15))
e) "Corporation" as any nonprofit California small business
financial development corporation (FDC) created pursuant to the
California Small Business Financial Development Corporation Law
(FDC Law). (Corporations Code (CC) � 14010 (a))
f) "Financial institution" as banking organizations including
national banks and trust companies authorized to conduct business
in California and state-chartered commercial banks, trust
companies, and savings and loan associations. (CC � 14010 (b))
g) "Financial company" as banking organizations including
national banks and trust companies, savings and loan
associations, state insurance companies, mutual insurance
companies, and other banking, lending, retirement, and insurance
organizations.
(CC � 14010 (c))
h) "Small business loan" as a loan to a business defined as an
eligible small business as set forth in Section 121.3-10 of Part
121 of Chapter 1 of Title 13 of the Code of Federal Regulations,
including those businesses organized for agricultural purposes
that create or retain employment as a result of the loan. (CC �
14010 (e))
1)Establishes the California Economic Development Fund in the State
Treasury for the purpose of receiving federal, state, local, and
private economic development funds, and receiving repayment of loans
or grant proceeds and interest on those loans or grants. Provides
that upon appropriation by the Legislature, moneys in the fund may
be expended by GO-Biz to provide matching funds for loans or grants
to public agencies, nonprofit organizations, and private entities,
and for other economic development purposes, consistent with the
purposes for which the moneys were received. (GC � 13997.6)
2)Enacts the California Small Business Financial Development
Corporation Law (FDC Law) with the intention of promoting the
economic development of small businesses by making available
capital, general management assistance, and other resources,
including loan services, personnel, and business education to small
business entrepreneurs, including women and minority owned
businesses, for the purpose of promoting the health, safety, and
social welfare of the citizens of California, to eliminate
unemployment of the economically disadvantaged of the state, and to
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stimulate economic development, employment, minority group, women,
and disabled persons entrepreneurship. (CC �� 14000-14091)
3)Establishes the California Small Business Expansion Fund (Expansion
Fund) for the purpose of retaining the moneys which separately
capitalize the SBLGP and paying out defaulted loan guarantees issued
under the SBLGP. Each account within the Expansion Fund is legally
separate and is prohibited from securing loan guarantees or other
obligations of another FDC. The state is not liable or obligated
beyond the funds allocated and deposited in an individual trust fund
account within the Expansion Fund. (CC � 14030)
4)Provides that upon notification that the state has received an award
under the federal Small Business Jobs Act of 2010 (15 U.S.C. Sec.
631 et seq.), the Director of the Department of Finance (DOF) shall
order that $20 million of state money in the Small Business
Expansion Fund be reverted to the General Fund and FDCs shall
prioritize the use of federal moneys over the use of state moneys
when granting new loan guarantees. (CC � 14044)
5)Makes findings and declarations that the Small Business Loan
Guarantee Program (SBLGP) has enabled participating small businesses
that do not qualify for conventional business loans or federal Small
Business Administration (SBA) loans to secure funds to expand their
businesses. States that these small businesses would not have been
able to expand their businesses in the absence of the program and
the program has also provided valuable technical assistance to small
businesses to ensure growth and stability. (CC � 14060.6 (a))
6)Requires FDCs to provide for and maintain a central staff to perform
all administrative requirements of the FDC. Provides that
reasonable costs incurred by a FDC in the creation and maintenance
of a central staff shall be paid to the FDC from state funds
including a portion of the interest earned on the expansion fund and
the FDCs trust fund account, if the FDC has a trust fund account,
otherwise, on the expansion fund. (CC �� 14061, 14062)
7)Declares the intent of the Legislature that the FDCs make maximal
use of their statutory authority to guarantee loans and surety
bonds, including the authority to secure loans with a minimum loan
loss reserve of only 20%, so that the financing needs of small
business may be met as fully as possible within the limits of
corporations' loan loss reserves.
(CC � 14076 (a))
This bill:
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1)Makes findings and declarations that the workload of California FDCs
has increased significantly since the state's receipt of funds from
the federal government pursuant to the Small Business Jobs Act of
2010 (Public Law 111-240).
2)States the intent of the Legislature that FDCs shall be under the
jurisdiction of GO-Biz and further intent that the office shall
provide each FDC with all appropriate administrative support to
implement its programs.
3)Appropriates the sum of $2 million from the General Fund (GF) to the
Director of GO-Biz, for the purpose of providing administrative
funding to FDCs. Provides that these funds shall be allocated to the
executive director, who shall distribute one $150,000 to each FDC,
made available until federal funding has been exhausted.
4)Provides that these funds shall be used to supplement, and shall not
supplant, other GF or other moneys made available for FDC
administration.
FISCAL EFFECT: According to the Assembly Committee on Appropriations,
this bill is an appropriation of $2 million in General Fund monies.
COMMENTS:
1. Purpose. The Author is the Sponsor of this bill. According to the
Author, FDCs serve the backbone of the California economy and have
a proven track record of helping businesses create and retain jobs.
The Author states that in the last decade, they've helped retain
101,248 jobs and created 19,970 new jobs.
According to the Author, FDCs have excelled with help from the
SBLGP but despite their track record, since 2008 FDCs'
administrative budgets have taken unnecessary reductions. The
Author states that as a result, staffing levels, and by extension
the ability of these FDCs to get loans out the door, has dropped
significantly. The Author cites the fact that in 2006, California
funded FDCs' administrative budgets to the tune of $4 million,
allowing for 1,357 loans. Since 2008, when FDC budgets were
slashed, loans dipped to less than 356. The Author notes that
without the administrative support that we've historically given
them, our FDCs stand to lose out on more than $50 million in
federal funding and more than $500 million in leveraging
opportunities. According to the Author, that's less job creation
at a time when California's unemployment rate is tied for last in
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the country.
2. Small Business in California. California's dominance in many
economic areas is based, in part, on the significant role small
businesses play in the state's $1.9 trillion economy. Businesses
with less than 100 employees comprise nearly 98% of all businesses,
and are responsible for employing more than 37% of all workers in
the state.
Among other advantages, small businesses are crucial to the state's
international competitiveness and are an important means for
dispersing the positive economic impacts of trade within the
California economy. California small businesses comprised 96% of
the state's 60,000 exporters in 2009, which accounted for over 44%
of total exports in the state. Nationally, small businesses
represented only 31.9% of total exports. These numbers include the
export of only goods and not services.
Historically, small businesses have functioned as economic engines,
especially in challenging economic times. During the nation's
economic downturn from 1999 to 2003, microenterprises (businesses
with fewer than five employees) created 318,183 new jobs or 77% of
all employment growth, while larger businesses with more than 50
employees lost over 444,000 jobs. From 2000 to 2001,
microenterprises created 62,731 jobs in the state, accounting for
nearly 64% of all new employment growth. More recently, the
federal Small Business Administration's Small Business Economy 2011
report stated that small businesses nationally outperformed large
firms in net job creation nearly three out of four times from 1992
through 2010 when private-sector employment rose.
During the recent economic downturn, however, small business owners
were especially hard hit. Equifax reported that bankruptcies in
California rose by 81% in 2009, as compared to 44% nationally.
This trend continued in 2010 where the Equifax report stated that
while in general bankruptcies were down across the nation including
some regions in the west, small business bankruptcies in California
accounted for almost 20% of all small business bankruptcies in the
nation.
3. Small Business Loan Guarantee Program. The SBLGP enables a small
business to obtain a term loan or line of credit when it cannot
otherwise qualify for a loan on its own. The state, working
through 11 FDCs, offers direct loans or loan guarantees that a
qualifying small business borrower could not otherwise obtain.
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Applicants must meet the definition of a small business (100 or
fewer employees) with the specific market rate loan terms and
interest rates being negotiated between the borrower and the
lender. Proceeds of the loan must be used primarily in California
for any standard business purpose applicable to the applicant's
business. The guarantee program provides guarantees covering up to
90% of the loan, but not exceeding $500,000. The guarantee program
allows a business to not only obtain a loan but to also establish
credit with a lender. The business is then more likely to obtain
additional future financing on its own.
In 2011/12, approximately $5.7 million was made available for loan
guarantees under the state SBLGP, which leveraged $9.9 million in
small business loans from financial institutions. During this
period 178 guarantees were provided, creating and/or retaining over
1,200 jobs. There are currently 1,046 loans being guaranteed under
the state program.
4. Small Business Jobs Act and Federal Guarantee Program. In October
2010, Congress passed and the President signed the Small Business
Jobs Act (Jobs Act). Among other things, the Jobs Act created the
State Small Business Credit Initiative (SSBCI), which is authorized
to expend up to $1.5 billion for state sponsored small business
finance programs. Over the life of the program, every federal
dollar must be matched by $10 from the private sector. September
2017 is the deadline for using the funds. Funding for the
administration, outreach, and oversight of the program is primarily
the responsibility of the state.
Under the funding formula, California is eligible to receive up to
$168 million, which is the largest amount of any state. The next
highest award is $97 million for Florida, with every state that
applies receiving a minimum of $13.1 million. California uses its
moneys to capitalize the SBLGP administered through the Business,
Transportation and Housing Agency (BTH) and a loss reserve program
and collateral support program administered through the California
Pollution Control Financing Authority at the state Treasurer's
Office.
Funding is awarded to states in three tranches with participating
jurisdictions allowed to apply for the next round of funding when
80% of their current funds are expended. Nine of the 57
participating jurisdictions have received second round funding and
three states are into their third and final round.
Of the $68 million California received in the first round,
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California has encumbered $16.6 million, with approximately $13.4
million set aside to cover loan guarantees under the federal
portion of the SBLG Program. Over 18, 600 jobs have been created
or retained by the close of 2012.
In 2011-12, approximately $36.2 million in guarantees were made
under the federal SBLGP, which leveraged $58.2 million in small
business loans from financial institutions. During this period,
203 guarantees were provided, creating or retaining 6,000 jobs
through guarantee activities.
There are currently 297 loans being guaranteed under the federal
program, 85% have been to businesses in low- and moderate-income
areas. Approximately 19% of the loans have been in the
accommodation and food services, 15% in construction, and 9.5% in
real estate and leasing, and 9.2 in retail trade. Relative to size
of business, 46.7% has had 11 to 50 employees and 36.8% have had
less than 10 employees.
According to the FDCs, one impediment to getting the SBLGP portion
out is the lack of state administrative support. Repeated budget
actions have severely limited ongoing management funds and crippled
the state portion of the program, which allowed greater
programmatic flexibility in serving the needs of small businesses.
5. FDC Funding. According to information provided by the Author,
historically, the state has provided for a portion of the FDCs
administrative costs through an annual payment that has ranged from
$120,000 to $418,000 a year. FDCs are paid an additional fee per
loan based on a percentage of the loan value. In the last few
years, both the state administrative costs and program dollars
available for FDC guarantees have shrunk significantly requiring
many of the 11 FDCs to lay-off employees and/or not replace vacated
positions. As an example, total loan guarantee volume went from
1,035 in 2008/09 to only 178 in 2011/12.
As California was preparing to receive the federal funding, the
Legislative Analyst Office opined that the receipt of the federal
dollars would mean the state could begin to back out its
administrative support for the program. This decision to pay lower
administrative costs is jeopardizing the state's ability to draw
down all available federal funds. Most recently, administrative
costs to the FDCs under both the state and federal program were
only $185,090, which is hardly sufficient to successfully deliver
tens of millions in loan guarantees to the state's small
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businesses.
In discussion with Committee staff, the U.S. Treasury was quite
clear that each state was expected to address administrative costs
for the programs that chose to operate. Federal guidelines limit
administrative costs in the first tranche to 5%, 3% in the second
and no administrative costs are allowed in the final installment.
AB 780 is an important step in ensuring FDCs have the capacity to
deliver the federal and existing state program by providing each
FDC with an additional $150,000.
6. Related Legislation This Session. AB 201 (Holden) requires the
director of the SBLGP to maintain a Web site that has information
on the programs administered through the statewide network of small
business financial development corporations. ( Status: The bill is
currently pending on the Senate Floor.)
AB 1247 (Medina) transfers the administration of the small business
financial development corporation managed programs from BTH to the
California Infrastructure and Economic Development Bank (I-Bank)
within GO-Biz. ( Status: The bill is currently pending in the
Senate Committee on Governance and Finance.)
7. Prior Related Legislation. AB 2523 (Hueso, 2012) authorized the
California Infrastructure and Economic Development Bank (I-Bank) to
enter into participation loan agreements and syndicated loan
agreements with financial institutions for loans they make to small
businesses. ( Status: The bill was held in the Senate Committee on
Appropriations.)
AB 2671 (Assembly Committee on Jobs, Economic Development and the
Economy, Chapter 648, Statutes of 2012) extended until January 1,
2018, the sunset date on the maximum allowable leverage of reserve
funds necessary under the SBLGP.
AB 894 (V. Manuel P�rez, 2011) would have created the California
Manufacturing Competitiveness Loan and Loan Guarantee Program to be
administered by an advisory commission within the State Treasurer's
Office. ( Status: The bill was vetoed by the Governor who stated
that "the objectives of this bill are excellent. However, the loan
programs it creates can be run by the state's Infrastructure Bank,
which already has authority and experience lending directly to
businesses.)
AB 901 (V. Manuel P�rez, Chapter 483, Statutes of 2011) expanded
the definition of financial institutions eligible to participate in
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the California Capital Access Program (CalCAP) and increased CalCAP
reporting requirements.
AB 981 (Hueso, Chapter 484, Statues of 2011) provided additional
incentives within the California Capital Access Program to
encourage lenders to lend to small businesses.
AB 1556 (Assembly Committee on Jobs, Economic Development and the
Economy, 2010) would have required grantees of Community
Development Block Grant funds for local revolving loan programs to
contract with approved financial intermediaries. ( Status: The
bill was held in the Assembly Committee on Appropriations.)
AB 2437 (V. Manuel P�rez, 2010) would have established the
California Manufacturing Competitiveness Act of 2010 to authorize
the California Industrial Development Financing Advisory Commission
to make loans or lines of credit available to companies, directly
through a contract with a participating financial institution.
( Status: The bill was vetoed by the Governor who stated that the
proper location of program in the bill is GOED and the bill would
create new higher costs to employers as a result of the prevailing
wage requirements on projects financed under the bill.)
SB 66 (Price, Chapter 637, Statutes of 2009) made various clean up
changes to the General Government trailer bill relating to the
Expansion Fund.
AB 610 (Price, Chapter 601, Statutes of 2007) raised the amount of
guarantee liability outstanding against the Expansion Fund to five
times the amount of funds on deposit in the expansion fund or in a
small business financial development corporation's trust fund
account.
AB 1104 (Aghazarian, Chapter 624, Statutes of 2007) extended the
authority of the Expansion Fund through a FDC to make small
business loan guarantees in an area affected by a state of
emergency within the state and declared a disaster by the President
of the United States, or by the Administrator of the federal SBA,
or by the United States Secretary of Agriculture. The bill also
modified the provision authorizing the executive director of the
Expansion Fund to request a trustee of a trust fund to invest funds
in securities issued by the United States Treasury.
AB 1431 (Arambula, 2007) would have established the Early Stage
Investment Guarantee Program, administered by the SBLGP to help
small businesses attract private investors during the early years
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of the businesses' growth. ( Status: The bill was held in the
Assembly Committee on Appropriations.)
AB 1695 (Bass, 2007) would have appropriated $40 million from the
State Highway Account to be placed within a newly created Surety
Bond Guarantee Account within the Expansion Fund and required the
FDC Director to establish and administer a surety bond guarantee
account within to assist small contractors with obtaining the
necessary bond and liability guarantees they need to compete for
state infrastructure projects. ( Status: The bill was held in the
Assembly Committee on Appropriations.)
AB 3057 (Assembly Committee on Jobs, Economic Development and the
Economy, 2006) would have extended the sunset from January 1, 2007
to January 1, 2012 on the Director of DOF's authority to transfer
moneys in the Special Fund for Economic Uncertainties to the
Expansion Fund, and made other technical changes. ( Status: The
bill was held in the Senate Committee on Appropriations.)
8. Arguments in Support. According to the Association of Financial
Development Corporations (TAFDCs), without the administrative
support that the State has historically provided, FDCs may not be
able to reach loan guarantee goals and the state stands to lose out
on more than $50 million in federal funding and more than $500
million in leveraging opportunities. TAFDCs believe that this bill
will greatly assist FDCs in rebuilding their office supports and
help them ensure small businesses are receiving the benefits from
federal money and the Small Business Loan Guarantee Program.
The California Bankers Association writes in support of this
measure, noting that this bill provides critical administrative
funding for a program that allows small business to access credit
from traditional financial institutions.
The California Independent Bankers (CIB) support this bill, which
will provide FDCs with the necessary means to help California small
businesses create and retain jobs. CIB states that this bill would
improve economic development in California and positively impact
the state.
9. Possible Clarifying Amendment. This bill codifies intent language
that FDCs shall be under the jurisdiction of GO-Biz and that GO-Biz
shall provide each FDC with "all appropriate administrative support
to implement its programs." Under the bill, GO-Biz is already
tasked with providing each FDC with $150,000 until all federal
funds are exhausted.
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If it is the Author's goal for GO-Biz to oversee the administration
of FDCs, and provide necessary support for these programs, the
Author may wish to consider clearly directing GO-Biz in statute to
do this, rather than stating intent.
SUPPORT AND OPPOSITION:
Support:
Association of Financial Development Corporations (TAFDCs)
California Bankers Association
California Independent Bankers (CIB)
Opposition:
None on file as of June 25, 2013.
Consultant:Sarah Mason